As Gomer Pyle would say, "Surprise! Surprise! Surprise!" (search that on YouTube, kids). The U.S. housing market has taken a frightening dive following the withdrawal of market-distorting federal government incentives. Sales of existing homes have dropped 27 percent in July over June levels, and new homes at an annual rate of 12 percent, the lowest rate since the government began tracking sales in 1963. Prices are sure to follow.

Buyers who snapped up overpriced inventory in order to grab a bit of that ever-popular OPM (other people's money) will shortly find themselves underwater on their mortgage. Many of these new buyers will walk away from homes they suddenly have found to be bad investments.

Well-meaning tax credits have transformed a stabilizing, albeit depressed, real estate market into one engulfed by a full-blown economic panic that again threatens the entire U.S. economy. Worse, the fleeting illusion of demand created by the credits spurred construction of even more homes, the one thing this market absolutely did not need. The ratio of sales to excess inventory is now worse than it was when the last economic bubble burst.

Perversely, the policy advocates of this scheme thought they were going to somehow stimulate a sleeping market and create demand. We've run an expensive experiment to prove the economic axiom that government subsidies do not create true market demand, jobs or much else. Subsidies redistribute wealth, often with tragic, unintended consequences. Tax schemes might spur a home buyer to buy a better home while putting another home on the market, move a 30-year-old out of the nest a bit earlier, sell a vacant vacation home, or more likely lure some newbies into the house-flipping game, but these are not sustainable sources of demand.

Is there a policy prescription that can create demand? Yes, but the answer isn't popular. This is tricky, so read carefully: The best way to fill more homes is with more people.

Surprise! At the most fundamental level, the source of demand for housing (and many other goods) is population growth. The U.S. fertility rate has been high compared with those of other industrialized nations. However, if not for the higher birth rate among immigrants, U.S. population growth would be below replacement levels. Selling more houses to a declining population is wishful thinking, and no federal boondoggle can oppose the laws of nature.

Our last real estate boom was driven from the bottom of the market. Rows of new McMansions were filled by middle-class families moving up as their homes in older suburbs were picked up by industrious working-class families moving out of the city center. Apartments and older homes in the city were filled by immigrants, many of them illegal, looking for a better life in the United States. If we want to resurrect the housing market and the broader economy, we must embrace intelligent immigration reform.